FCA consults on regulation of ESG rating providers
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The Financial Conduct Authority is consulting on proposals to make environmental, social and governance ratings “transparent, reliable and comparable”, requiring providers to be authorised. The FCA will give support for firms with a pre-application service. The consultation closes on 31 March next year.
The proposals follow the government’s decision to bring ESG ratings within the FCA’s remit in response concerns about transparency, quality and conflicts of interest.
About 5,400 UK financial services firms use externally produced ESG ratings, according to FCA research, spending a combined £622m on data products that include ESG ratings during the year up to November 2024, with half of users using the ratings from four of the largest providers.
Regulating providers was supported by 95% of those who responded to a government consultation on the question, the FCA noted. Final rules are expected in the fourth quarter of 2026, and the new regime will come into effect on 29 June 2028.
The FCA estimates its proposals will result in about £500m in net benefits over the next decade, helping to build the market’s trust in ratings and “address concerns”.
Research by the watchdog suggests about half of ESG ratings users are worried about how the ratings are built (55%) and how transparent they are (48%). Some market participants question what is being measured, or have found errors in ratings and factual errors. There is also concern about conflicts both at an organisation and individual level, for example where a rating provider might offer consultancy services to rated companies or where a person has information they might take advantage of to make or influence transactions.
The proposals aim to address this through:
The proposals follow the government’s decision to bring ESG ratings within the FCA’s remit in response concerns about transparency, quality and conflicts of interest.
About 5,400 UK financial services firms use externally produced ESG ratings, according to FCA research, spending a combined £622m on data products that include ESG ratings during the year up to November 2024, with half of users using the ratings from four of the largest providers.
Regulating providers was supported by 95% of those who responded to a government consultation on the question, the FCA noted. Final rules are expected in the fourth quarter of 2026, and the new regime will come into effect on 29 June 2028.
The FCA estimates its proposals will result in about £500m in net benefits over the next decade, helping to build the market’s trust in ratings and “address concerns”.
Research by the watchdog suggests about half of ESG ratings users are worried about how the ratings are built (55%) and how transparent they are (48%). Some market participants question what is being measured, or have found errors in ratings and factual errors. There is also concern about conflicts both at an organisation and individual level, for example where a rating provider might offer consultancy services to rated companies or where a person has information they might take advantage of to make or influence transactions.
The proposals aim to address this through:
- allowing easier comparisons for the benefit of both those who use ratings and those who are rated;
- ensuring clear decision-making along with oversight and quality assurance;
- identification and management of conflicts of interest; and
- setting clear expectations for stakeholder engagement and complaints handling.
The FCA said the proposed rules are designed to be proportionate to business size and risk.
The regulations are principles-based and accompany new legislation. The Financial Services and Markets Act 2000 (Regulated Activities) (ESG Ratings) Order 2025 - published in October and subject to parliamentary approval – has a broad definition of ESG ratings. A ranking system, score or similar about any part of E, S or G is covered, regardless of whether it is explicitly labelled as an ESG rating. Crucially, under the order, this only applies if the rating or score is “is likely to influence a decision to make an investment”, which differentiates it from similar rules in the EU, according to law firm CMS.
“Our proposals will give those who use ESG ratings greater trust and confidence – supporting our goal of increasing trust and transparency in sustainable finance. This will enhance the UK’s reputation as a global sustainable finance hub – attracting investment and supporting growth and innovation,” said Sacha Sadan, the regulator’s director of sustainable finance.
The proposals draw on an existing voluntary industry code of conduct and recommendations by the International Organization of Securities Commissions, but are not based on any taxonomy as the government scrapped plans for a UK green taxonomy in July.
The research that informed the ESG ratings proposals found the highest proportion of rating users were in investment management, pensions and retirement income, and retail investments. A high proportion (63%) of users had internal resources – on average nearly three full-time employees – just to assess the suitability and reliability of ESG ratings. A fifth (21%) of this resource is spent on resolving issues or requesting information from rating providers, the FCA found.
The Investment Association is in favour of regulating ESG rating providers but equally does not want it to limit the industry. Carol Thomas, head of sustainability and responsible investment at the IA, said ESG data and ratings providers play an essential role in providing information and services that impact on investment decisions: “As such, we welcome the consultation and hope to see a proportionate approach to regulating ESG ratings providers, one which does not impede the growth and evolution of sustainable and responsible investment.”
The regulations are principles-based and accompany new legislation. The Financial Services and Markets Act 2000 (Regulated Activities) (ESG Ratings) Order 2025 - published in October and subject to parliamentary approval – has a broad definition of ESG ratings. A ranking system, score or similar about any part of E, S or G is covered, regardless of whether it is explicitly labelled as an ESG rating. Crucially, under the order, this only applies if the rating or score is “is likely to influence a decision to make an investment”, which differentiates it from similar rules in the EU, according to law firm CMS.
“Our proposals will give those who use ESG ratings greater trust and confidence – supporting our goal of increasing trust and transparency in sustainable finance. This will enhance the UK’s reputation as a global sustainable finance hub – attracting investment and supporting growth and innovation,” said Sacha Sadan, the regulator’s director of sustainable finance.
The proposals draw on an existing voluntary industry code of conduct and recommendations by the International Organization of Securities Commissions, but are not based on any taxonomy as the government scrapped plans for a UK green taxonomy in July.
The research that informed the ESG ratings proposals found the highest proportion of rating users were in investment management, pensions and retirement income, and retail investments. A high proportion (63%) of users had internal resources – on average nearly three full-time employees – just to assess the suitability and reliability of ESG ratings. A fifth (21%) of this resource is spent on resolving issues or requesting information from rating providers, the FCA found.
The Investment Association is in favour of regulating ESG rating providers but equally does not want it to limit the industry. Carol Thomas, head of sustainability and responsible investment at the IA, said ESG data and ratings providers play an essential role in providing information and services that impact on investment decisions: “As such, we welcome the consultation and hope to see a proportionate approach to regulating ESG ratings providers, one which does not impede the growth and evolution of sustainable and responsible investment.”
